Incorporated in 1974 by the Ministry of Railways (MoR), Rites (earlier known as Rail India Technical & Economic Services) is a mini ratna (Category-I) Schedule A public sector enterprise offering transport and engineering consultancy in India. The focus is on railways, urban transport, roads and highways, ports, inland waterways, airports and ropeways, leasing, export, maintenance and rehabilitation of locomotives and rolling stock, turnkey projects on engineering-procurement-and-construction (EPC) for railway line, track doubling, laying the third line, railway electrification, wagon manufacturing, renewable energy generation and power procurement for Indian Railways (IR) through joint ventures, subsidiaries or consortium arrangements.

The 43 years of experience includes projects in over 55 countries including Asia, Africa, Latin America, South America and Middle East regions. Rolling stock is exported, excluding Thailand, Malaysia and Indonesia. Clients are public sector undertakings (PSUs), government agencies and instrumentalities and Indian and foreign large private sector corporations.

Of the total revenues, around 67.1% came from sale of consultancy services, 7.4% from leasing services, 16.9% from exports, 6.8% from turnkey projects and around 1.7% from power generation in the nine months ended December 2017.

The aim is to increase the scale of operations in railway infrastructure by taking up turnkey projects and expanding services for metro and airport projects. Joint ventures (JVs) and subsidiaries will be used to increase the share of business in renewable energy generation and power procurement for IR, manufacturing of wagons and joining upcoming opportunities such as station development.

Railway Energy Management Company, with 51% stake, has been formed with IR for generation and procurement of power including through renewable energy. The balance 49% is owned by MoR. The subsidiary provides project management and other consultancy services for IR for setting up wind energy projects, solar energy projects, power procurement and construction of transmission lines.

To increase operations in the emerging sectors, projects such as renewable energy generation, power procurement and railway electrification have been undertaken. These include turnkey projects to modernize railway workshops. The Union government has set specific targets for installation of generation capacity and procurement of renewable energy for all PSUs and governmental instrumentalities. For IR, it is 20% of the total consumption through renewable energy. Reducing the carbon footprint through utilization of green energy presents a business opportunity.

A JV with Sail manufactures wagons including high end specialized wagons for IR and other domestic and overseas customers and produces ancillary units to repair, manufacture parts of locomotives, machineries, equipment and other related components.

The objects are divestment and get the benefits of listing to enhance its visibility and brand image and provide liquidity to the existing shareholders.

The Central government will own 87.4% of total paid-up equity share capital post listing.

Strengths

The asset-light business model is useful to make handsome gains.

More than 65% of the revenues come from sale of services and around 25% from sale of products and rest from others.

The multidisciplinary engineering and consultancy organization provides a diversified and comprehensive array of services from conceptualizing to commissioning all the facets of transport infrastructure and related technologies under one roof.

The standalone order book of Rs 4818.68 crore end March 2018 included 353 ongoing projects of over Rs 1 crore each. Around 53% of the orders are from consultancy services, 3% from leasing services, 14% from overseas customers and around 30% is from turnkey construction projects. Of the total contracts on hand, 77% are from Central and state governments and the rest from others. The order book comprises a highest value export order of Rs 680 crore from Srilankan Railways for supply of locomotives.

As per the Planning Commission, railways will see an investment of around Rs 4.9 trillion in the 13th Five_year Plan ending in March 2022 (FY 2022) compared with Rs 2.4 trillion in the 12th plan that ended in FY 2017. A significant increase in investments will boost the order book and earnings.

The diversified portfolio of consultancy services in the transport infrastructure sector enables access to sectors with growth potential and also to expand operations in sectors in which there already is significant presence. Over the years, the railway consultancy services provider has evolved into a diversified multi-disciplinary transport infrastructure consultancy and engineering organization undertaking a wide gamut of services.

Most of the local and global clients are Central government, state governments, national governments, governmental instrumentalities, corporations, authorities and PSUs and large private organisations. There has been no incidence of any bad debts or non-recovery of dues.

The significant presence in international geographies will go to reduce dependency on the domestic ordering and tendering business. Recently, a contract was bagged to consult the government of Mauritius on implementing a light-rail project and prepare a detailed report on the Trident port project. Other orders include Nepal's two integrated check-posts at Birgunj and Biratnagar and to supply 18-meter gauge locomotives to Myanmar. As many as 120 broad-gauge passenger services coaches have been exported to Bangladesh and detailed project reports for an airport at Rwanda and ports project in Sri Lanka have been completed. Preparation of project report and consultancy has been assigned for the east bank-east coast road linkage in Guyana in South America.

Due to being associated with IR, the fourth-longest rail network in the world, several assignments on nomination and single-tender basis are received from various government ministries, organizations and departments including IR because of the ownership by MoR coupled with the ability to execute business in compliance with various policies and procedures of governmental departments.

Weaknesses

There is significant dependence on IR and government policies. Any change in decisions by MoR including the scope of work, presence in geographies can significantly affect the revenues.

Certain covenants such as directing the manufacture of certain locomotives and rolling stock and components to IR facilities can hamper growth. Future, competitive position will be determined by the ability to provide locomotives and customized rolling stock as per the requirements of the clients. Dependency on the production facilities of IR is a drawback.

Policies of the Union government such as the opening of foreign direct investment in the railway sector to encourage competition means the status as a nominated production agency will change to that of a competitive bidder and might suffer loss of new business or lower margins.

Dependency on MoR means there is no full compliance with the Companies Act, Securities and Exchange Board of India's listing requirement and other corporate governance regulations. Also, ongoing disclosure on information post listing will also be limited.

Valuation

Consolidated net sales were up 24% to Rs 1353.36 crore and the operating profit margins (OPM) stood down 620 basis points to 26.5%, thereby limiting the growth of operating profit (OP) to 1% at Rs 358.28 crore in FY 2017. A change in product-mix led to lower margins. The other income (OI) was up 54% to Rs 209.92 crore. Interest cost stood at Rs 11.33 crore, while depreciation increased 10% to Rs 38.26 crore. Thus, profit before tax (PBT) rose 14% to Rs 518.61 crore. Total tax to be paid declined 13% to Rs 145.38 crore and share of loss from associates stood at Rs 11.47 crore. As a result, consolidated profit after tax (Pat) could jump 28% to Rs 361.76 crore.

Consolidated net sales stood at Rs 936.15 crore, with OPM of 32%, resulting in OP of Rs 299.65 crore in the nine months ended December 2017. OI stood at Rs 124.91 crore. Interest cost was at Rs 5.27 crore and depreciation was Rs 27.68 crore, resulting in PBT of Rs 399.61 crore. After providing for total tax of Rs 136.76 crore and the share of loss of associates coming at Rs 2.31 crore, consolidated Pat stood at Rs 252.54 crore. Due to seasonality of business, the nine-month earnings cannot be annualised.

As a result of consolidated cash and bank balance of Rs 1131 crore and liquid investments Rs 249.19 crore end December, there is no debt at the net level. Cash per share, thus, works out to Rs 69. MoR has directed a minimum dividend of 30% of profit earned every year or 5% of net worth, whichever is less.

At the higher price band of Rs 185, the P/E on FY 2017 EPS (on current diluted equity of Rs 200 crore) of Rs 18.1 works out to 10.2. Engineers India (EIL), a PSU, is the nearest comparable player focused on similar services in the oil & gas sector. It is currently trading at P/E of around 22 times FY 2018 EPS.

RITES: Issue highlights

Offer for sale ( in Rs crore)

- On lower price band

453.60

- On upper price band

466.20

Price Band (Rs)

180-185*

Bid size ( in no of shares)

80.00

Post issue share capital (Rs crore)

200.00

Post-issue Promoter & Group shareholding (%)

87.4%

Issue open date

20-06-2018

Issue closed date

22-06-2018

Listing

BSE, NSE

Rating

55/100

*Discount of Rs 6 to retail investors

RITES: Consolidated Financials

1303(12)

1403(12)

1503(12)

1603(12)

1703(12)

1712(09)

Net Sales

955.63

1096.49

1012.69

1090.53

1353.36

936.15

OPM (%)

22.8%

25.6%

34.3%

32.7%

26.5%

32.0%

OP

217.67

281.05

346.96

356.38

358.28

299.65

Other in.

127.42

126.98

146.42

136.20

209.92

124.91

PBDIT

345.09

408.04

493.37

492.57

568.20

424.57

Interest

0.00

0.00

0.00

4.71

11.33

5.27

PBDT

345.09

408.04

493.37

487.86

556.87

419.29

Dep.

15.52

20.35

26.15

34.64

38.26

27.68

PBT

329.57

387.69

467.22

453.22

518.61

391.61

EO

0.00

0.00

0.00

0.00

0.00

0.00

PBT after EO

329.57

387.69

467.22

453.22

518.61

391.61

Tax (including Deferred Tax)

102.97

124.40

156.03

167.69

145.38

136.76

PAT

226.59

263.29

311.19

285.53

373.23

254.85

Share of Associates

6.60

-2.68

1.03

-2.60

-11.47

-2.31

PAT after MI and share of Associates

233.19

260.61

312.22

282.93

361.76

252.54

EPS (Rs)*

11.7

13.0

15.6

14.1

18.1

#

*EPS is on post issue equity capital of Rs 200 crore of face value of Rs 10 each # EPS not annualised due to seasonality of businessFigures in croreSource: Capitaline Database